The history of health reimbursement arrangements (HRAs)

Health Reimbursement Arrangements (HRAs) have become a cornerstone of employer-sponsored healthcare benefits in the United States. These employer-funded plans offer a tax-advantaged way to reimburse employees for qualified medical expenses, providing flexibility and cost control for businesses while helping employees manage healthcare costs. This article explores the rich history of HRAs, from their origins to their current role in the benefits landscape.

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The Origins of Employer-Sponsored Healthcare

The roots of employer-sponsored healthcare in the U.S. trace back to the early 20th century, during the industrial revolution. Employers began offering basic health services onsite to attract and retain workers in physically demanding jobs. By the 1940s, employer-based health insurance became more structured, with companies purchasing group health policies from insurers. These plans allowed employers to cover employees' medical costs as a "defined benefit," a practice incentivized by Congress’s 1954 decision to make employer contributions tax-deductible.

This era laid the groundwork for modern healthcare benefits, including HRAs, as employers sought innovative ways to manage rising healthcare costs and address gaps in traditional insurance coverage.

The Emergence of HRAs

The concept of reimbursing employees for healthcare expenses predates the formal establishment of HRAs. By the 1960s, employers began creating informal "healthcare arrangements" to help workers manage out-of-pocket medical costs not covered by insurance. These arrangements eventually evolved into HRAs, which were officially recognized by the Internal Revenue Service (IRS) in 2002.

IRS Guidance in 2002

In 2002, the IRS issued Revenue Ruling 2002-41 and Notice 2002-45, which provided clear guidelines for HRAs:

• Employers could contribute funds to HRAs for employees to use on qualified medical expenses.
• Reimbursements were tax-free for employees and tax-deductible for employers.
• HRAs could be used to reimburse individual health insurance premiums, offering an alternative to traditional group plans.

This marked a turning point in HRA history, enabling employers to offer flexible benefits tailored to their workforce's needs.

Key Legislative Milestones

HRAs have been shaped by several significant legislative changes over the years:

Affordable Care Act (ACA) – 2010

The ACA introduced new regulations that limited standalone HRAs used for individual health insurance premiums. These restrictions led many employers to reduce or discontinue their HRA offerings temporarily.

21st Century Cures Act – 2016

In response to ACA limitations, the 21st Century Cures Act created Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). These allowed small businesses with fewer than 50 employees to reimburse workers for individual insurance premiums and medical expenses on a tax-free basis.

Expansion of HRAs – 2019

New regulations under the Trump administration introduced Individual Coverage HRAs (ICHRA), which allowed employers of all sizes to reimburse employees for individual health insurance premiums. This innovation reinvigorated interest in HRAs by offering more flexibility than traditional group health plans.

Types of HRAs

Over time, different types of HRAs have been developed to meet varying employer and employee needs:

1. Qualified Small Employer HRA (QSEHRA): Designed for businesses with fewer than 50 full-time employees, QSEHRAs allow reimbursement of up to $6,150 per individual and $12,450 per family annually in 2024.
2. Individual Coverage HRA (ICHRA): Introduced in 2020, ICHRAs enable employees to purchase individual health insurance using pre-tax dollars. They are highly customizable and can be tailored based on employee classes.
3. Excepted Benefit HRA (EBHRA): Available alongside traditional group health insurance plans, EBHRAs allow up to $1,950 annually for specific expenses like dental and vision care but cannot be used for comprehensive health insurance premiums.

How HRAs Work

An HRA is not an account but an arrangement where:

• Employers allocate a fixed amount annually or monthly.
• Employees incur eligible medical expenses and submit claims for reimbursement.
• Funds are reimbursed only after claims are approved; there is no pre-funding.

Unlike Health Savings Accounts (HSAs), HRAs are not portable—employees lose access if they leave their job unless specific provisions like retiree-only HRAs are offered.

Eligible Expenses

HRAs can cover a wide range of expenses depending on their type:

• Individual health insurance premiums
• Deductibles and copayments
• Vision and dental care
• Prescription medications

However, non-medical expenses like gym memberships or childcare are generally excluded.

Advantages of HRAs

HRAs offer several benefits for both employers and employees:

1. Tax Advantages: Contributions are tax-deductible for employers and tax-free for employees.
2. Cost Control: Employers set fixed reimbursement amounts, avoiding unpredictable premium increases associated with group plans.
3. Flexibility: Employers can customize eligible expenses and contribution levels based on workforce needs.
4. Employee Empowerment: Employees gain greater control over how they spend their healthcare dollars.

Challenges Facing HRAs

Despite their advantages, HRAs face some challenges:

• Regulatory Complexity: Navigating compliance with IRS rules and other federal regulations can be daunting.
• Limited Portability: Unlike HSAs, unused HRA funds typically revert to the employer when an employee leaves.
• Awareness Gap: Many small businesses remain unaware of newer options like QSEHRAs or ICHRAs.

Nevertheless, ongoing legislative efforts continue to expand HRA options and simplify their administration.

Future Outlook

The future of HRAs looks promising as employers increasingly seek alternatives to costly group health insurance plans. With innovations like ICHRAs gaining traction, HRAs are poised to play a central role in reshaping employer-sponsored healthcare by offering personalized benefits that align with employee preferences.